Philosophy Case Study on Tax Inversions
- Executive Summary
In most systems, there exist loopholes, in the tax system of the United Stated of America there are such loopholes which allow for corporate inversions. Tax inversions allow companies in U.S to evade paying taxes by relocating to a foreign country on paper. This is achieved by a relatively larger American company acquiring a smaller one overseas where the tax is relatively lower. This topic has raised political as well as concerns of the American consumers. The U.S corporate tax is the highest in the world at 35% and other countries like Ireland record as low as 12.5%. When the companies shift profits overseas in an attempt to avoid the payment of corporate tax, the government loses a lot of money in the form of corporate tax.
While tax inversions in the U.S are legal then this issue can be referred to as ethical legalism. But we cannot turn a blind eye that it takes away jobs from the U.S and raises questions of patriotism. In a nutshell, I would recommend a reformation on the tax system. To address this issue, first, the government should know why the countries are leaving in the first place. At 35% America records the highest corporate tax but failing to collect effectively. The tax system is also designed in a way that it collects taxes irrespective of where the profits are made. It should tax the profit that is only made within its borders. This will encourage companies to bring home the profits made overseas. The paper has also discussed ethical issues related to tax inversion in two parts. The first part acknowledges the failure of corporations to be ethically accountable to its some of its stakeholders while the second justifies why inversion is unpatriotic. A proposed policy is included which mainly suggests corporate tax reforms.
Tax inversion is a move by an American company to move its tax domicile abroad. A larger American company merges with a smaller company overseas so as to avoid paying tax in the U.S. Corporate tax in the U.S is the highest in the world at 35%, by relocating to another country, the companies aim at saving a lot. Ireland’s tax rate is at 12.5%, Switzerland 18% and the UK at 21% which are all way lower than the rate in the U.S. When the companies relocate on paper, they continue to enjoy the benefits of operating as a U.S company such as access to U.S market, workers, support for research and development, rule of law among others. This process is actually not illegal but just a loophole which these companies exploit. Corporate inversions also give way for “earnings stripping” which is a method used by big foreign companies to shift their profits out of the U.S in an attempt to pay tax.
There are several stakeholders in the process of tax inversion, this includes people who are affected by this practice in one way or the other. The first stakeholder is the corporation or the company. They are the beneficiaries of this practice. The main reason why they engage in tax inversion is to maximize their profits by avoiding tax. Another stakeholder is the U.S government. The treasury loses billions of money through these tax inversions. When a company engages in tax inversion then the tax it would have paid to the government is taken elsewhere. This makes the government losers in this system and even though they are alone, they feel the immediate impact. The ordinary people or the citizens are also stakeholders. The main reason that the government collects tax is so that it can fund projects that are beneficial to its people. This includes roads, schools, healthcare among others. Citizens, therefore, feel the impact of tax inversion in the long run.
Investors also have their part to play in tax inversion. This is individual or other companies who commit capital with the expectation of better return. The shares of Burger King rose to 19.5% when they announced their interest to embark on tax inversion in just a single day. This shows that these investors also like and support tax inversion.
- Ethical Analysis Part 1
Tax inversions have raised some ethical questions in relation to the various stakeholder discussed in this paper. Before a company considers embarking on tax inversion then they should consider the effects of all the stakeholders involved. We have discussed the reasons why companies engage in tax inversion which is to maximize their profit. Medtronic is a multinational company, one of the biggest medical technology companies in the world which successfully inverted in 2015 and claiming its headquartered in Ireland. The corporate tax rate in the U.S is 35% and that of Ireland is only 12.5% which means that the company has increased its profit tremendously since it inverted. Omar Ishrak, a chief executive of Medtronic claims that their inversion move was as much a corporate strategy as tax. He also acknowledges the tax benefits that were accompanied with their move.
This means that to the company the move was a plus. The investors would also gain from this inversion move as explained by Mr. Ishrak who says that the move would avail the money needed by the company to meet its pledge of returning half of the free-flowing cash to the investors. The deal ensured that 60% of the free-flowing cash was at the company’s disposal compared to the 35% it had access to when it was still based in Minnesota. Multinational companies have stashed around $ 2.4 trillion offshore which would translate to around $ 695 billion if it was returned to the country and taxed. Projections have also indicated that the amount U.S government collects as the corporate tax could reduce overtime if companies continue with inversion.
The tax system is designed to help the government run properly. When we imagine a scenario with all the companies engaging in tax inversions then we can get the bigger picture. Just because it is permissible doesn’t mean that it is ethical. All the countries should pay their fair share and be accountable for their social responsibility. The government and the law protect these companies and the society or citizens provide the market for this companies. Failing to pay their fair share means that they are failing their moral obligation. The same way it would be wrong for the government not to have laws that protected these companies regarding property and other important elements that they require to run effectively. The corporations have a moral obligation of social responsibility to ensure that stagnant growth and poverty in the country is eradicated. There is nothing wrong with them making money but if it means that it focuses only on improving the lives of a few individuals and leaving the rest in the same old conditions, it, therefore, becomes unethical.
Medtronic, like other multinational corporations, has been accused of “earnings stripping”. This exercise also aims at cutting taxes paid by the U.S government. This is unethical because the profits are actually made in the country and it is the society who help make this profits. A business should care for the well-being of its consumers and in this scenario, the market is also the society in which the business operates. If the small and growing companies can afford to pay taxes, then why would the big corporations fail to pay their fair share? “When companies exploit loopholes like this, it makes it harder to invest in the things that will keep America strong for future generations. . .. Many of those loopholes come at the expense of middle-class families – because that lost revenue could have been used to invest in our schools, make college more affordable, put people back to work building our roads, and create more opportunities for our children.” Said president Barrack Obama when delivering a statement on the economy (Zients and Hanlon per 5).
According to the president, it is the money that the government gets as tax from these corporations, is what is used to improve the life of people in the society. When these companies indulge in tax inversions it, therefore, means that they are failing to honor their moral obligation towards the citizens and society (Slemrod p 14).
- Ethical Analysis Part 2 (Patriotism and Tax Inversions)
A common definition of patriotism is “love for one’s country” and devotion to its well-being. If someone loves their country, then they will be loyal to it. Some people, even political leaders including the president have branded tax inversions unpatriotic. The question then comes is it really unpatriotic for corporations to indulge in tax inversions? Medtronic relocated its corporate headquarter from Minnesota to Covidien for the purposes of maximizing profits. Some might argue that they acted within the law and constitution. From the above ethical perspective then we can consider what they did and what other multinational companies to be unpatriotic. When a corporation is devoted to the well-being of the country, their own interests should come after those of the country.
Stephen Nathanson defines patriotism as involving four major components namely; Special affection for one’s own country, a sense of personal identification with the country, Special concern for the well-being of the country, Willingness to sacrifice to promote the country’s good. Medtronic might have included the three elements of patriotism but failed to include the fourth which is the willingness to sacrifice to promote the country’s good. Omar Ishrak says that they had access to a higher percentage of free-flowing cash than when they were based in Minnesota which enabled them to return half to the investors. He also said previously they used to borrow when they had their headquarters in Minnesota and complied to the tax system of the U.S. The company, therefore, failed to sacrifice or continue sacrificing for the well-being of the country and the people.
As the president put it, tax inversions crippled the government in trying to improve the lives of the citizens. Failure of the company to pay their fair share meant that they did not have a special concern for the well-being of the country. When other members of the community are still in poverty and the society is stagnant they are making profits, and growing their business. Patriotism and ethics of belief state that if patriotism is tied to a set of virtues that one’s country has then a neighboring country might have these virtues even of higher standards than in one’s own country. Medtronic and other multinational companies like the Burger King and Apple might find the tax systems of other countries relatively lower than that of U.S which is highest at 35%. According to Stanford Encyclopedia of Philosophy, Patriotism means that your loyalty should be tied to your country because only that country is yours. In this case, U.S is their country and that is why they only change their location on paper but still operate in the country.
When a patriot identifies with the virtues of his or her country then they should identify as a single unit. Multinational corporations engage in tax invasions omitting the fact that there are several countries that pay taxes as required by the government. The other companies and the citizens do not choose a tax system so why should they. Those who are patriotic stick to the existing tax system and it is unpatriotic to let them stand alone. If there is a problem with the tax system, then they should find a patriotic way to change it in a way that is favorable. The U.S have been known for its patriotic nature. If we can take a sneak peek at the 9/11 attacks, we find that the true nature of American patriotism was brought to life. It is during such trying times that patriotism can be seen. Just like mentioned above, if all the corporations failed to pay tax then the economy would be in crisis.
In ethical patriotism, a policy or a law can be unjust or humane but is beneficial to the majority. When the United States tax rate on corporations is at 35%, the corporations might suffer but the general public would benefit, there would be better infrastructure and social services. The country is famous for its infrastructural development. Tax inversions would mean that this development is hindered or stagnated. Corporations, therefore, have an ethical obligation to act patriotically. The corporation should, therefore, return its headquarters in Minnesota and work with other multinational corporations in persuading the government to adopt policies that create a favorable business environment in which they can operate. They should also bring back the profits they have made overseas to ensure the development of the country ((Leo p 1).
- Policy Proposal
Tax inversion has already been part of the system but life must continue and the government must operate. Due to the benefits that are associated with it, more corporations might find it appealing and also engage in tax evasions. First and foremost, we have to focus on the root cause of the problem and tackle it from there. Most of the multinational corporations that engage in tax evasion aim at increasing their profit since they find the tax rate in the United states to be too high. The tax system should be therefore revised. If the government loses billions of dollars yet tax the remaining companies higher than some balance should be created. The tax rate on corporations should be lowered to around 25%. This will also attract some foreign companies with markets in U.S, meaning more job creation and a better life. Investors will not also shy away from injecting capital in businesses with the fear of low return.
Apple company admits to having its hardware manufactured out of U.S, this would encourage such companies to bring back the manufacture of their products back to the country and as the president-elect, Mr. Trump puts it “make America great again”. The corporate tax also allows for the taxation of profits that are made overseas which has made most corporations reluctant to bring the profit they make abroad back home. The rate at which they are taxed is also the same. Because of this it is not surprising that there is $2 trillion and growing which is the profit made by corporations overseas and nobody knows when it will be brought to the country, maybe this is the solution. Instead of not taxing these profits the treasury can tax a company 2% lower than the country in which they have made the profit when it is brought home. For example, Ireland tax rate is 12.5%, the government could tax Medtronic 10.5% when it brings the profit back home.
Around 20 years back cases of inversions were rare until other countries slashed their rates but U.S maintained the rate that is when tax heavens started emerging. This means that had they done the same then this problem would never have been here today. The third policy would be to make inversion harder and limit them. This can be done by amending the rule that allows inversion. What I would propose is, a larger company founded in the U.S soil should not be allowed to change it headquarters upon the purchase of another company. If a larger company from overseas purchases a smaller U.S company, then it can relocate its headquarters. The final recommendation would be to give a tax holiday once every year for 2 years so that companies which have lots of money overseas and fear taxation can bring the money back home so that it can circulate and be taxed in other forms (Eicke p 25).
Tax inversions have cost the U.S around $695 billion in tax and loss of so many jobs. This paper has discussed the nature of tax inversion and dangers associated with it. It gives a detailed account of how it is related to patriotism as well as the ethical aspects related to it. The ethical analysis is divided into 2 parts, part 1 relates tax inversion and its stakeholder while part 2 relates it to patriotism. It has been projected by the White House that if the status quo is maintained then more companies would flee in search of tax heavens. Some of the measures that can be taken to curb this exodus are also discussed herein. The policy proposal examines the problem from the root causes which should make it very effective in eradicating this problem. This paper mainly encourages cooperation’s to be patriotic and contribute to making the country develop as a single unit, not as single business entities or individuals with the acknowledgment of an existing corporation’s high tax rate.
Eicke, Rolf. Tax planning with holding companies-repatriation of US profits from Europe: concepts, strategies, structures. Vol. 22. Kluwer Law International, 2009.
Leo Previti, J. D., and MBA CPA. “The Sustainability of the US Corporate Income Tax System.” SGBED wishes to recognize the following sponsors (2016): 1077.
“Patriotism”. Stanford Encyclopedia of Philosophy, 2009, http://plato.stanford.edu/entries/patriotism/. Accessed 1 December 2016
Slemrod, Joel. The economics of corporate tax selfishness. No. w10858. National Bureau of Economic Research, 2004.
Zients Jeffrey, Hanlon Seth. The Corporate Inversions Tax Loophole: What You Need to Know, 2016, www.whitehouse.gov/blog/2016/04/08/corporate-inversions-tax-loophole-what-you-need-know. Accessed 1 December 2016
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